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Dilemma in transition to Green Energy
Published on: Sunday, April 14, 2024
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Sabah’s Gemusut oil field: OGSE firms have to juggle between sustainability and survivability in meeting the global demand for net-zero emissions.
Thereafter, my current portfolio covering the development of the National OGSE Sustainability Roadmap (NOS-R), led me to learn about what appears to be a nuisance in the OGSE industry — the “sustainability dilemma”.
OGSE companies have started to embark on the sustainability journey, and they often need to decide between sustainability and survivability. These two fundamental objectives determine the long-term viability of the companies and stakeholders involved, including all vendors in the supply chain.
So, why not choose both?
Unfortunately, achieving sustainability and survivability at the same time can be challenging, and often these objectives conflict with each other. I learnt about this predicament from my engagements with OGSE companies en route to NOS-R development.
This article explores this dilemma, its underlying challenges and potential solutions.
Let us start by defining “sustainability” and “survivability” in the context of this article to represent the best arguments surrounding the moral, environmental and economic implications of pursuing one goal over the other.
Sustainability, as often referred to, is the capacity to meet current needs without compromising the ability of future generations to provide for theirs. In the OGSE industry, sustainability means reducing the environmental impact of oil and gas exploration and production activities by minimising the carbon footprint, water usage and waste generated along the entire value chain.
Sustainability is crucial because it ensures that the industry can operate harmoniously with the natural environment, which is essential for long-term viability.
Survivability, on the other hand, is defined as the ability of a company or industry to withstand external pressures such as changes in supply and demand, political instability and technological advancements.
In the OGSE industry, survivability is essential because it ensures that companies can continue to meet the growing demand for oil and gas exploration and production activities worldwide. Without survivability, companies could face bankruptcy or financial distress, causing a ripple effect on the entire industry.
Now, how is sustainability a nuisance?
From a moral standpoint, ignoring sustainability concerns and prioritising survivability could be perceived as short-sighted and selfish, as it means putting immediate financial gain ahead of the welfare of future generations.
On the other hand, prioritising sustainability over survivability could also be viewed as impractical and unwise, as it could result in massive job losses and lead to industry collapse and economic instability.
From an environmental perspective, prioritising sustainability over survivability could rock the “energy trilemma”: a shortage of oil and gas supply, resulting in higher costs; increased dependence on unreliable sources; and slowing the transition to green energy.
Conversely, prioritising survivability over sustainability could lead to long-term damage to the ecosystem due to oil spills, carbon emissions and other consequences of oil and gas exploration activities.
From an economic viewpoint, prioritising sustainability over survivability could lead to higher costs and lower returns. However, it could also increase the industry’s social and environmental “licence to operate” (borrowing the term from the Petronas Activity Outlook 2023-2025), resulting in long-term financial stability and sustainable growth.
Prioritising survivability over sustainability could lead to short-term cost savings and long-term financial instability due to the increased risks associated with expensive insurance policies and reputational damage.
Let’s pause and do a reality check
The harsh reality is that the survival of OGSE companies depends heavily on their ability to make profits.
These companies operate in a highly competitive market. Their revenue streams are subject to volatile commodity prices, global political and economic changes, and increasing environmental and regulatory pressures.
For example, in 2020 and 2021, OGSE companies had to take drastic measures to cut costs, streamline operations and reduce the workforce to survive during the ongoing Covid-19 pandemic.
Another factual reality is that OGSE companies are under increasing pressure to transition to a more sustainable business model. Everyone knows OGSE companies must reduce their carbon footprint, minimise waste and adopt environment-friendly practices.
This pressure comes from various stakeholders, including investors, regulators, operators and civil society groups, who demand more transparency and accountability from the industry.
For example, investors require environment-friendly business activities aligned with the Paris Agreement. PwC, in 2022, reported that global Environmental, Social and Governance (ESG) investment will reach US$33.9 trillion in 2026, making up 21% of the assets under management.
Bank Negara Malaysia will impose rules announced by the Task Force on Climate-Related Financial Disclosures (TCFD) starting in 2024. TCFD requires borrowers to comply with the “four pillars” of sustainability: governance; strategy; risk management; and metrics and targets.
Bursa Malaysia (under the purview of the Securities Commission Malaysia) will make these mandatory from 2025 for the Main Market and 2026 for the ACE Market.
Petroliam Nasional Bhd has clearly stated its commitment to reduce its carbon footprint under its Net Zero Carbon Emissions by 2050. Other big operators such as Shell, BP, Equinor, Eni and TotalEnergies have pledged to achieve net-zero emissions by 2050, covering Scopes 1, 2 and 3.
Globally, many countries, including 86% of oil-producing countries, have set ambitious targets for net-zero emissions by 2050/60, including the US, Saudi Arabia, Canada, the United Arab Emirates, Australia, China and Brazil.
As a result of increasing awareness of climate-related issues, customers also require suppliers to demonstrate their environmental and social performance and reduce their carbon footprint.
All the above scenarios would have a direct impact on OGSE business activities. As businesses must follow the money trail, OGSE companies are expected to contribute to the net-zero emissions targets.
Points are well taken; what’s next?
The next bigger challenge is to find a way to accomplish both objectives without compromising one for the other.
On a positive note, there are potential solutions to this dilemma. OGSE companies should integrate sustainability into their business strategies, including setting sustainability targets, developing a sustainability road map detailing the steps to achieve these targets and reporting transparently on their progress.
When planning for investments, OGSE companies should cultivate a long-term attitude by incorporating sustainability into their investment choices, for instance, by creating sustainable practices that reduce environmental harm and create value for stakeholders in the long run.
Such practices may include investing in new technologies with lower emissions, shifting to green energy and collaborating with local communities to promote sustainable development.
To date, some OGSE companies have invested in clean energy and reduced their carbon footprint. For instance, some companies have developed renewable energy projects, while others have invested in carbon capture and storage technologies.
However, these efforts are often limited by the need for short-term profitability. For example, investing in renewable energy technologies may require significant upfront capital investment, which can be challenging to justify in the short term.
Similarly, reducing emissions may require significant operational changes that can disrupt the business and require substantial investment.
Another approach is to diversify its portfolio of services to include sustainable solutions. For example, companies can offer services that help customers reduce their carbon footprint or improve their environmental performance. Hence, OGSE companies can tap new markets and differentiate themselves from competitors.
Last but not least, governments and regulators play a crucial role in incentivising sustainable practices by implementing policies encouraging companies to prioritise sustainability.
These policies can include providing incentives to the first movers, setting clear energy transition targets and harmonising regulations requiring companies to disclose their governance, environmental and social impacts.
It is now apparent that the (only) way to achieve one of the fundamental objectives is to adopt the other. On that note, I believe the sustainability dilemma is a challenge we can overcome.
At MPRC, we hope the NOS-R will provide clarity, among others, regarding sustainability best practices, including adherence to recognised sustainability standards or frameworks, disclosures and reporting. By joining our efforts, we will ensure the sustainability of the OGSE industry and our planet.
Nor Asmah Mohd Noor is the project manager of the National OGSE Sustainability Roadmap at the Malaysia Petroleum Resources Corporation, Ministry of Economy. This appeared in the Edge.
- The views expressed here are the views of the writer and do not necessarily reflect those of the Daily Express.
- If you have something to share, write to us at: [email protected]
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